Major projects & construction 5 Minute Fix 21

Cladding update

In WA, the Building Amendment Regulations (No. 2) 2018, which came into effect 6 October 2018, prescribe new applicable building standards for non-combustible external walls. Instead of seeking to tackle the hazards posed by cladding by banning specified building products (as NSW and Victoria have done), the Amendment Regulations seek to regulate building standards through specification and compliance with rigorous standards for fire propagation testing. The Amendment Regulations do not have retrospective effect but any new building work in an existing building may be affected.

The Western Australia Department of Mines, Industry Regulation and Safety (DMIRS) has issued an industry bulletin that outlines the effect of the regulatory changes and contains some answers to FAQs.

Also in WA, the Building Commission is conducting an ongoing state-wide cladding audit. The audit applies to all publicly and privately owned buildings of three or more storeys, constructed or refurbished after 2000, that fall within BCA classes 2, 3, 4 and 9 and which have cladding attached or incorporated. DMIRS has published the latest interim audit findings.

The status update of 28 September 2018 identified a total of 1,734 privately owned buildings and 1,964 publicly owned buildings with cladding attached. Almost all of the publicly owned buildings within the audit scope had been inspected, with 1,785 cleared on initial review and 122 referred for more detailed risk assessment. Only seven publicly owned buildings have been referred for remedial action, one of them being the Department of Fire and Emergency Services building located in Cockburn, WA.

Of the 448 privately owned buildings already inspected, only one (located in the regional area of Peel) has been referred for further action (although a total of 116 were referred for detailed risk assessments before being cleared). The audit is due to be completed by 31 December 2018.

With cladding audits ongoing across the country, a number of recent media articles have highlighted the absence of publicly available information about buildings affected by dangerous cladding. While Victoria, NSW and Queensland have also each compiled cladding audit lists, the state authorities have not made the lists publicly available given the preliminary nature of the lists (greater scrutiny is needed to determine whether cladding rectification works is necessary) and privacy concerns. However, Queensland's recent cladding reforms (which commenced 1 October 2018) contain provisions requiring disclosure of information regarding compliance with the 3-stage cladding process to new owners. It remains to be seen whether the other States will introduce similar disclosure requirements.

Legislation update

NSW

The Strata Schemes Management Amendment (Building Defects Scheme) Act (NSW) 2018 (SSMA Act) received Royal Assent on 27 September 2018. As previously reported, the SSMA Act amends the NSW Strata Schemes Management Act 2015, relevantly by:

• increasing the penalty payable by a developer for failing to provide a building bond (to 10,000 penalty units/$1.1 million);
• allowing the Commissioner for Fair Trading to determine the amount of a building bond absent agreement between the developer and owners’ corporation, and to procure a building report assessing rectification costs for that purpose;
• affording authorised officers appointed by the Commissioner for Fair Trading greater investigative and enforcement powers (for example, to enter premises and carry out inspections and to require the provision of information and records); and
• stipulating that a building bond must be provided (on terms acceptable to the Commissioner) before an application is made for an occupation certificate (rather than as a condition to the issue of a certificate).

Victoria

In Victoria, the Building Amendment (Registration of Building Trades and Other Matters) Act 2018 (Vic) (BA Act) received Royal Assent on 25 September 2018.

Again, as previously reported in 5 Minute Fix, the BA Act:

• introduces more rigor into the registration and licensing of builders to perform certain types of building work;
• provides for the prohibition of high risk external wall cladding products;
• gives municipal building surveyors powers to require destructive testing; and
• allows Councils to:
  • enter into “cladding rectification agreements” with building owners (or owners’ corporations) and lending bodies to fund the performance of building works required to "rectify cladding"; and
  • declare and levy a cladding charge to fund such rectification works.

Queensland

The Building and Other Legislation (Cladding) Amendment Regulation 2018 (Qld) discussed in 5 Minute Fix 16 commenced operation on 1 October 2018. The Regulation imposes a range of obligations on owners of "in scope" buildings. In the first instance, owners are required to complete an online checklist identifying which buildings are affected by combustible cladding by 29 March 2019 (unless an extension is granted by the Queensland Building and Construction Commission). Thereafter, further steps may need to be actioned by owners depending on the type and extent of cladding disclosed.

More on Security of Payment …

Can a payment schedule "provided out of time stand as an answer" to a claimant's subsequent adjudication application? Despite valiant argument by the plaintiff to the contrary, Justice McDougall of the New South Wales Supreme Court confirmed that the answer is "no".

In Forte Sydney Construction v Lin Betty Building Group [2018] NSWSC 1429, the plaintiff purported to serve a payment schedule responding to the first defendant's (LBBG) payment claim later than the time required by the Building and Construction Industry Security of Payment Act 1999 (NSW). While the time for delivering the payment schedule expired on 8 June 2018, Forte purported to provide it on 15 June. Subsequently:

• LBBG gave notice of its intention to seek an adjudication on 17 July 2018;
• Forte did not provide a payment schedule within 5 business days after receipt of LBBG's notice as required by section 17(2)(b) of the Act; and
• an adjudicator was appointed and made his determination on 10 August 2018 (which was then provided to the parties on 13 August 2018).

Forte sought to have the determination quashed on three grounds, including that the adjudicator denied it natural justice by failing to consider the 15 June payment schedule. Justice McDougall, however, concluded that on a proper construction of the Act, the time for provision of the payment schedule contemplated by section 17(2)(b) runs from the time of receipt of the section 17(2)(a) notice "because the earlier opportunity for provision of a payment schedule has lapsed".

In this, Justice McDougall noted that he should follow the views of Justice Einstein in Taylor Projects Group Pty Limited v Brick Dept Limited [2005] NSWSC 439 unless Hi Honour was "persuaded that they were plainly wrong". In this case, Justice McDougall was not so persuaded.

ACL thwarts recalcitrant debtor making representations as to financial capacity

The Federal Court of Australia recently considered the question whether oral representations as to financial capacity, made by a party in settlement discussions, can constitute misleading and deceptive conduct in contravention of section 18 of the Australian Consumer Law (ACL). While the case was about loan agreements rather than a construction contract, it provides a useful reminder of the fraught legal issues which can arise in settlement agreements for construction-related disputes.

In Ye v Zeng (No 7) [2018] FCA 1478, a case described by Justice Lee as "bedevilled by a lack of focus on the real issues between the parties" and displaying a "bewildering array of causes of action", the following (relevantly) transpired:

• the applicant, Mr Ye, sought enforcement of an arbitral award made in the People's Republic of China under sections 8 and 9 of the International Arbitration Act 1974 (Cth);
• orders were made by the Federal Court to this effect and, subsequently for that purpose, appointing a receiver to the property of the respondents in Australia;
• thereafter, the respondents initiated discussions with Mr Ye culminating in, first, the signing of Agreements putting in place a regime for repayment of the respondents' debts (an arrangement more favourable to the respondents than that provided for by the Court's orders) and secondly, orders of the Court vacating the appointment of a receiver; and
• as the respondents (whose "recalcitrance" in paying debts was, Justice Lee noted, "longstanding") did not meet their obligations under the Agreements, Mr Ye sought orders restoring the status quo ante on the basis the Agreements were "procured by unconscionable conduct or misleading, deceptive or fraudulent conduct" under the ACL.

While Mr Ye had sought to enforce judgment against properties in China owned by the respondents that were also the subject of freezing orders (and which, as noted by the Chief Justice of the Court, were "highly leveraged to Chinese lenders"), in the context of the discussions giving rise to the Agreements, the respondents, "in order to convince [Mr Ye] to give up his strong commercial position", represented that they owned a further three unencumbered properties in China.

In the final analysis, and after consideration of the constituent elements required to establish a misleading and deceptive conduct case, Justice Lee concluded that the relevant representations were made "in trade or commerce" and that the Agreements were entered into in consequence of conduct that contravened s 18 of the ACL. The respondents, he observed, "were seeking to delay payment" in the "Micawber-like" hope that their fortunes would alter. Thus the Agreements were set aside and declared void ab initio, and the status quo ante restored.

QBCC withstands challenge to constitutionality

What happens if construction companies in Queensland and another jurisdiction share a common director and the entity in that other jurisdiction is placed into liquidation? Unhappily for Midson Construction (Qld) Pty Ltd, it enlivened the procedures contained in the Queensland Building and Construction Commission Act 1991 (QBCCA) for cancellation of its building licence.

In Midson Construction (Qld) Pty Ltd v Queensland Building Construction Commission [2018] QSC 199, Midson Qld made application to the Supreme Court of Queensland seeking declaratory and injunctive relief and judicial review after receiving notice of proposed cancellation of its builder’s licence under sections 56AF and 56AG of the QBCCA.

Relevantly:

• sections 56AF and 56AG provide for cancellation of a licence if a licensed individual/company is an "excluded" individual/company under section 56AC;
• section 56AC applies to an individual if a "construction company" (as defined in section 56AC(7)) suffers a prescribed insolvency event; and
• by virtue of section 56AC(6), a company is an "excluded company" if, among other things, an individual who is a director of that company is an "excluded individual".

These provisions were brought into play in this case in the circumstances that:

• Midson Construction (NSW) Pty Ltd was placed into liquidation; and
• both Midson Qld and Midson NSW shared one common director.

The applicants challenged the notice alleging, first, that Midson NSW was not a "construction company" for the purposes of section 56AC and, further, that certain provisions of the QBCCA were constitutionally invalid (prompting the Attorney General for the State of Queensland to intervene in the proceedings).

Specifically, the applicants took aim at the relevant definition of "construction company" which refers to a company that performs building work "in this or another State". In essence, the applicants contended the words "or another" could not be afforded their literal meaning as this would preclude a "reputable and solvent construction company in Queensland" from continuing to operate. After surveying the relevant principles of statutory interpretation, the Court rejected that argument, concluding the words should be afforded their "plain and ordinary meaning".

As to the constitutionality of section 56AC, the applicants submitted the provision purported "to regulate conduct in another State in a manner which offends the proscription against extraterritorial regulation of another jurisdiction". The applicants were similarly unsuccessful in this contention, the Court declining to accept that the QBCCA purported to "regulate" building work or any other matter in another jurisdiction:

"Rather, the Act seeks to protect Queensland consumers of building work and building services by allowing a mechanism for a building licence to be cancelled in Queensland if there is sufficient connection to financial instability of an associated entity in another State".

Contractors in Queensland should be mindful of this issue if they have similar corporate arrangements in place involving other jurisdictions.